The Heat

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It’s too damned hot
It’s too damned hot
I’d like to swoon with my baby tonight,
But it’s too damned hot

America is sweltering. It is 115 back on the East Coast, say the papers. Local governments are mobilizing to try to prevent people from getting cooked. Boston is even said to have a system of automatic phone calls, urging people to check on their neighbors. And thus has even the spirit of neighborliness been hollowed out in the modern world, reduced to a phone message from a machine.

We recall the news from New Orleans after the flood. Six weeks after the event, a man finally decided to check on his own mother. There she was, it turned out, right where he left her — in her bedroom. But she was less talkative. Less warm and friendly. Less energetic. She’d been dead for at least five weeks. Too bad New Orleans didn’t think of that automatic phone system.

The heat is said to be putting a strain on everything: energy, nerves, and money. Our guess is that everything is under strain already. The latest figures show consumer spending still going up, but barely. Meanwhile, inflation — even by the Fed’s measure — is at its highest level in four years. If we’re right, the higher prices and higher mortgage payments (minimum payments are now about 50% higher than they were a year ago) are forcing consumers to cut back. Consumer spending is two-thirds of the entire economy, so any pullback by consumers means an economic slump. Rising prices added to slowing economy equals stagflation.

If you are going to fight stagflation, you have a choice: you can strike at the stag or the ‘flation, but not both at the same time. The stag needs lower interest rates to kill it; the ‘flation thrives on them. To kill ‘flation takes higher rates, but high rates just make the stag stagger even more. Is that clear, dear reader? Never mind. The point is, you have to fight one and then the other. And the one you have to eliminate first is inflation. To fight the stag you’re going to need some kind of stimulus. But the stimulus won’t work as long as people expect it to increase prices. Central bank legerdemain only succeeds by trickery. When people catch on, the magic disappears.

So, the Fed has to go after inflation. That is why Ben Bernanke has been raising rates; he knows he has to have inflation under control or he can’t fight deflation. Short rates have been notched up 450 basis points already — the most in 40 years. Is ‘flation’ beaten? Not according to the news reports.

But we will take an additional guess. Our guess is that the Fed cannot pursue the fight against inflation — even if it hasn’t yet won, because the stag is staggering. The marginal consumer’s knees are wobbling. He is feeling the heat already. Beads of sweat are on his forehead. His hands shake. Raise rates again and he will fall on his face. The rate hikes are over.

Ed. Note: Stagflation — the investment killer — is rearing its ugly head once again…but you don’t have to let it crush your wallet. In fact, we have 11 simple, low-risk investment ideas to arm yourself with to keep your portfolio healthy for the rest of the year. Find out what lies ahead for our economy and what strategies you can use to make the second part of 2006 more profitable than the first:

A Midyear Update for an Insane Economy

u2022 It is the good ol’ summertime here at Ouzilly. This has nothing to do with money, but in the summer we permit ourselves a little more lighthearted commentary on things that really matter.

We got back from Vancouver on Saturday. Maria came back from her acting camp in Italy on Monday. Jules and Henry came back from Paris on the weekend. Edward was here already, enjoying playing with his cousin…and the four children of a friend from America.

At dinner last night, we had a liberal feminist from New York seated next to a fundamentalist Christian…and, of course, the family itself…each with his or her own view of how things should be done. Our fundamentalist friend said grace; our liberal friend looked embarrassed…or was it contemptuous? It was like she was expecting an art show and found herself in a tent revival.

We always encourage people to visit in August. It is the only month we are reliably in one place, with a little time on our hands to visit. But the group is usually so large, we need help in the kitchen. This year, we advertised, and got Carol, a woman from Alabama. Rather than typical French fare, we’re having grits, biscuits and fried green tomatoes — helped along with a flood tide of cheap Gaillac wine.

Yesterday, Carol found some pigs feet in the freezer and cooked them for dinner.

“Eeewww…” came the protests.

But Carol redeemed herself with the dessert course — a rich pound cake. “Hmmm…” came the approvals.

So, we are rediscovering American cuisine. And rediscovering each other.

“Play something for us, Jules,” said Elizabeth after dinner. We recalled when Jules sang a solo in church at the age of eight. His voice was so pure, so perfect and true, it brought the parishioners to tears. Now, at 18, his voice has lost its choirboy timbre, but it is still true. This time, he sang “Hallelujah” by Leonard Cohen, accompanying himself on the guitar. Again, we were all misty-eyed at the end.

Every child has the ability to bring his parents to tears, Jules more than most.

Jules doesn’t think he should have to work in the summer.

“Why should I?” asked Jules, “Dad is always getting me to help him with his own projects…like that stonewall. But he could perfectly well hire someone to do it. It’s just a form of egotism…to make others do what you want them to do. It’s not a necessity for the family. We don’t need that wall. I don’t care if it’s never built. And, besides, he could certainly pay a professional to do it. I’m not a child any more, and I don’t think I should be forced to do this kind of thing.”

“No…Jules,” we replied. “We don’t think you should be forced to do it either. We think you should do it because you want to help.”

“But I don’t want to help…” came Jules response.

u2022 “Yes, poor, Clothilde,” said Pierre yesterday, bringing us up to date on a common friend. “She was diagnosed with breast cancer. She’s very religious, so she prayed to the Virgin Mary and hoped for the best. But it wasn’t enough. And she seems to have waited too long…now the cancer has spread.

“But that isn’t the whole story. She’s also in love with a local guy. You know, she’s over 45 and I guess she must be feeling a little like this is her last chance. And she’s been pining for this guy for years. So, when the doctor advised her to get a mastectomy, she figured it would spoil her chances with him. So, she did nothing.

“Unfortunately, the fellow wasn’t all that serious anyway, so the whole situation is a disaster from her point of view. It didn’t work out with the guy — it never would have. And now, she’s facing her cancer more or less alone…”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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